[ applause ] >> thank you. thank you. thank you. [ applause ] tonight on c-span 3 a senate banking hearing on federal oversight of the mortgage industry. a discussion about saudi arabia's efforts to stop terrorism. and foreign policy analysts discuss south korea's vent presidential election. at a senate hearing today the head of the federal housing finance agency medical watt urged congress to end the federal government's conservatorship of fanny may and freddie mac. they questioned him about programs to help mortgage borrowers. this is two hours. >> fanny may and freddie mac have now been in conservatorship

for close to nine years. in september, 2008, then treasury secretary hank paulson famously described the conservatorships as a time-out. today fanny and freddie along with fha continue to dominate the mortgage market. approximately 70% of the mortgages are backed by the federal government. while fanny and fred dir currently earning profits, if the housing market experience a downturn, taxpayers could again be on the hook for billions of dollars. the status quo is not a viable option. the housing finance system dependent on two government sponsored enterprises and perpetual conservatorship is not a sustainable solution. taxpayers today bear too much risk and the government plays too big a role in the mortgage market. a number of groups have released proposal for reform in recent months. including the iba, mill ken institute, several coauthors

writing jointly for the urban institute, and many others. the committee is considering all of these proposals as well as other ideas about what the future system should look like. in the meantime, f hrks a serve as regulator of the enterprises and as regulator of the federal home loan banks. as conservator of the gse easy, they're obligated to preserve and conserve the as 70s franny and freddie mac. they have undertaken a number of initiatives in recent years including some that began prior to director watt's tenure. the platform was originally intipped to function like a market utility, independent from the enterprises. that would be used to issue both agency securities and private label securities. the platform has instead been developed specifically for securities issued by fanny mae

and fredty mack. one important question as we embark on this is whether we should utilize the csp or consider other alternatives such as extraneous and itting the jenny mae platform. another important development housing finances is the increase transfer of credit risk from the enterprises to the private sector. i erne courage them to continue to experiment with different forms of risk transfer, including both front end and back-end structures. transferring credit risk away from the government and into the private sector is essential to protect taxpayers and to build a more robust and sustainable market. increasing the amount of credit risk born by the private sector will abe critical comb ponment of housing reform. regardless of which direction the committee ultimately decides to take. >> i encourage director watt to consider other policies and options to incentivize further private sector participation and to help facilitate the transfer

to a new system. housing finance reform remains the most significant piece of up finished business following the financial crisis and it is important to build bipartisan support for a path forward. three years ago seven republicans and six democrats on this committee voted in support of a comprehensive housing finance reform bill. a key priority of this congress is to build on that bipartisan legacy and pass legislation that will create a sustainable housing finance system for future generations. i look order in to working with you, director watt, and your staff at the fhfa throughout this process. senator brown. >> thank you, mr. chairman, director watt, well, you back. nice to see you again. thanks for your public service for so many years. i appreciate the chairman's calling this hearing and establish a bipartisan committee process by which we can consider the conservatorship of the government-backed mortgage companies. since the beginning of the year there have been several articles

claiming that housing finance reform is easy, some calling it an easy win for the trump administration. as the chairman and as any of us who were on the committee in 2013 and 2014 know, restructure a fifth of the economy is far from easy. that doesn't mean we should avoid considering how the housing market cooperate better and how we can prevent emergency government and emergency taxpayer intervention in financial markets in the future. currently in agreement between treasury and federal housing finance agency requires the government-sponsored enterprises to reduce their capital cushions each year until the reserves meet zero in january, 2018. at that point gses will be prohibited from retaining any capital at the end of each following quarter, despite the fact that the companies back more than $5 trillion in the mortgage market. director watt has been raising his concerns about dangers of the capital levels at the gses

for some time. we should remember he was one of the first members of the house of representatives to warn about predatory lending prior to the housing crisis. unlike those warnings about predatory lending which the administration largely ignored at the time, i'm hopeful we can protect taxpayers from what is an avoidable situation created by an agreement entirely within the executive branch. some argue any adjustment to the retained capital levels is equivalent to the supporting of -- of supporting a return to the old structure of the gses. as arguments go, this is surely a strawman. there's no reason we can't protect taxpayers and homeowners. protecting taxpayers in the near term should be a shared and a bipartisan goal. the committee should continue its work examining the gaps in the housing market that the housing crisis exposed. the original to distribute model of certain lenders, exotic products that put even prime

borrowers at risk, private label securities that were not backed by gses, and lack standardized terms and responsibilities for trustees, and a near complete breakdown in mortgage servicing and the ability of monoline mortgage insurers to fulfill their commitments. gse easys made mistakes too, chasing the market, providing pricing discounts to be lenders based on volume, using price advantages to achieve shareholder gains rather than passion those benefits on to borrowers in or lenders that served underserved communities. gse mission is to provide a stable, liquid national mortgage market, including in rural, underserved, and low-income communities. something we should all want in any housing finance system. the affordable housing goals for single family and multifamily housing along with the duty to serve rural that was finalized

in december, are key tools to prioritizing affordable housing acts to safely reach underserved borrowers. only the changes congress makes will impact how expensive or affordable the 30-year fixed rate mortgage will be in the future and who has access to it. our decisions will impact how easily and quickly a growing family could sell their current home and buy a more expensive one. our decisions will impact which lenders have access to the system and whether a home buyer can get a mortgage from the small community lender in her town. these decisions are not just about back-office operations or far away capital markets. they will have a substantial impact on households across the country, whether renters or homeowners. thanks for joining us as the committee seeks to understand the current status of the gses and how we move forward without harming homeners or buyers and

putting taxpayers at greater risk. >> thank you very much, senator brown. i do welcome you director watt we appreciate the service you have given and are continue to give as we move forward to deal with the housing finance policy of our nation. >> i want to remind all the senators as we go into the question period to honor the five-minute rule with regard to the question periods so that senators who are in line can get their opportunities. director watt, i would ask you to feel free to give your full statement and so would you please proceed at this time. >> chairman crapo, ranking member brown and members of the committee, thank you for inviting me to testify. your hearing topic confirms that you are well aware that the conservatorships of fanny mae and freddie mac have been unprecedented, especially considering that these enterprises support over $5 trillion in mortgages.

of additional importance is that taxpayer backing under the preferred stock purchase agreement is now limited to $10,818,000,000,000 for fanny mae, and 141 billion for freddie mac, and additional draws will reduce these commitments further. our focus on three points in my opening statement. my first point is that fhfa has made numerous important reforms to the enter priepzs during conservatorship that are beneficial to the housing finance system and reduce risk to taxpayers. my written statement discusses a number of these reforms and provides links to detail reports about them. despite these reforms, i regularly hear assertions that fanny mae and freddie mac are the same today as they were when

they were placed into conservatorship. it is essential for this committee to be aware that these assertions are simply false and to ensure that the reforms already made are not disregarded. despite the reforms already made, fhfa is fully aware that housing finance reform will involve many crucial decisions that go far beyond these reforms. so the second point i want to make unequivocally is that it is the role of congress, not fhfa to make the decisions that chart the path out of conservatorship and to the future housing finance system. among the important decisions for congress are the following. one, how many -- how much

backing, if any, should the federal government provide and in what form? two, what transition process should be followed to avoid disruption to the housing finance market and who should implement that process? three, what roles, if any, should the enterprises play in the reformed housing finance system and what statutory changes will be required to ensure that they play those roles effectively? and four, what regulatory framework and authorities are needed in a reform system and who will have that responsibility? i reiterate that it is the role of congress to do housing finance reform and i encourage you to do so expeditiously. my final point is to identify

and discuss the most significant challenge fhfa faces while congress moves ahead on reform. the challenge is that additional draws under the pspas would reduce the amount of taxpayer backing and the foreseeable risk that resulting uncertainty could adversely impact the housing finance market. unfortunately, this challenge is significantly greater today than it has been, and it will continue to increase if not addressed. when i first discussed this in 2016, each enterprise had $1.2 billion under the pspas as a buffer to shield against having to make additional draws of taxpayer support in the event of an operating loss in any quarter. on january 1, 2017, the pspa

buffer reduced to $600 million and on january 1, 2018, it will reduce to zero. at that point, neither enterprise will be able to weather any quarterly loss without drawing further taxpayer support. gap accounting for any number of noncredit related factors in the ordinary course of business regularly results in large fluctuations in enterprise gains or losses. we also know that lower corporate tax rates under the -- under tax reform would reduce the value of the enterprises deferred tax assets and result in short-term losses. like any business, the enterprises need some buffer to shield against short-term operating losses.

in fact, it is especially irresponsible for the enterprises not to have a limited buffer because a loss in any quarter would result in an additional draw of taxpayer support and reduce treasury's fixed dollar commitments under the pspas. as conservator, we reasonably foresee that this could erode investor confidence and stiefl liquid ditty in ways that could increase the cost of mortgage credit to borrowers. as conservator, fhfa cannot risk these consequences and meet our statutory obligation to ensure that each enterprise fosters, quote, liquid efficient, competitive, and resilient national housing finance markets, kwoezclosed quote.

consequently in our conservatorship role, fhfa will take actions as necessary to prevent additional draws of taxpayer support. neither this dmit committee nor anyone else should view such actions either as interference with the per rogtives of congress, as every forts to influence the outcome of housing finance reform, or as any step to recap and release. we will take only such actions as necessary to avoid normal operating losses that would trigger a draw during conservatorship. thank you again for the opportunity to testify and, as always, we stand ready to assist the committee in any ways we are requested to do so. >> thank you very much, director watt. i appreciate that commitment. my first question i'd like to focus on private capital. among the reforms that you

listed in your written testimony, more fully, you discuss some of the efforts that the agency has undertaken to increase the participation of private capital in the markets. since fha first started publishing its scorecard in 2012, an important component has been reducing taxpayer risk by attracting private capital and shrinking the footprint of the enterprises. under your leadership, fhfa has overseen a significant increase in the amtd of credit risk transfer to the private sector which i apply and encourage you to work to continue to increase. in addition to the existing risk transfer deals that ufr already engaged, what can fhfa and the enter priermz dos to reduce taxpayer risk and to attract more private capital to the mortgage markets? >> well, the first thing we do regularly is to not take loans that people cannot afford to pay. we have a defined credit box and

we try to encourage lenders to use that credit box. but we will not take a loan outside that credit box. the second thing we have aggressively done is had the enterprises innovate in the risk transfer space moving first to kind of second-loss positions or intermediary positions but then moving to first-loss position when's if is financially feasib feasib feasible to do so. so i think the objective here is to make the whole system as responsible and not obviously move back to the kinds of practices that were taking place prior to the crisis. >> all right. thank you very much in that. and, as you know, achieving this objective will be one of the important things that we seek to

do here as we work on legislation to resolve housing finance policy. i'd like to go as my final question to you in this round, to capital at the enterprises, you your final topic that you discussed with us. on january 1, 2018, the capital bufrz that the irnt prizes will draw down is zero, requiring fanny mae and freddie mac to draw on their lines of credit with the treasury in the event of a quarterly loss. this confirms to me why this is unsustainable. no capital, taxpayers on the hook for losses and the government effectively taking all the risk. while i understand that you have concerns with the gsc easy operating with zero bufrz, adding a small capital buffer does not change the need for a long-term solution to our housing finance reform. unfortunately, suspending dividend payments will lead some to incorrectly believe that

reform is not urgent and that maintaining the status quo is sustainable. i'd erne courage you to work with this committee so that that does not occur. could you please respond to that? >> first of all, let me just say i absolutely agree with you, we're going to try to avoid a draw at all costs because we think there are risks associated with it. and as conservator, our position is a little bit different than everybody else. i kind of liken it to the situation i faced several weeks ago when i went home and had a letter in my mailbox that said my car was subject to recall because of the air bag. well, there were a number of people who were saying the risk of you driving that car is -- is minimal. and i absolutely agreed with them. but i was the responsible party and my family was going to have

to ride in that car. and so in this situation, the cars that you all have given us are fanny mae and freddie mac, it's our responsibility to keep them safe and sound, to make them efficient while they are in conservatorship, and it's your responsibility to change cars if you want to after that or whatever you decide to do. >> well, let me ask the question this way. do you believe that the fhfa has the authority to withhold dividend payments. >> i do, yes. >> without the consent of treasury and -- >> i do, yes. yes. but i also want to assure that you my first option, obviously, would be to work with the secretary of treasury. these are contractual agreements, they're not legislative agreements. the pspa is a contractual agreement between us and the secretary of treasury.

so modest changes tots pspa would be the first and most prudent way to address this issue. >> understand. >> but if that fails, the responsibility for that risk falls back on me as the conservator of these enterprises and we cannot afford to run that risk. >> well, thank you. my time has expired and so i would just like to ask if you and your staff could provide us with your legal analysis as to why you believe that you have the authority without getting agreement from the secretary of treasury and dealing with the third amendment. >> be happy do that, sir. >> thank you very much. senator brown. >> thank you, mr. chairman and director watt, again, thank you. your testimony you talked about the potential and who knows what impending concerns you have about tax reform and short-term losses. let me start with that. the president's proposed tax reform plan that would cut the

corporate tax rate from 35 to 15, if the finance committee and others would come to that, we don't know yet obviously. moody ef mates that would cost fanny 15.6 billion and freddie 5.7 billion. since the stock purchase agreement between fhfa limits the gse's retained capital this year as you spoke about and prohibits retained capital next year, talk to us about the impact that that would have on the gses and their financial ability, especially what it would do to impact access in mortgages in the broader housing market. so you spoke about sort of generally. if you would dig down a little deeper on tax reform and where that goes. >> so one of the things we obviously are monitoring on a regular basis are these discussions about tax reform, because they would have, if they are adopted and did he pending

on -- depending on what is adopt wod have differential impacts. they could range in our analysis from a low of like $5 billion up to 25, $26 billion. and obviously the extent of those tax reforms will have -- and that's a short-term impact. this is not a commentary on the value of the reduction in the corporate tax rate. we're talking about the short-term impact of that corporate tax rate cut on deferred tax assets which then has a short-term impact on -- on the enterprise's losses. so one of the things we are regularly doing is talking to -- to treasury and monitoring what is happening in that tax cut

space. because if we wait until that happens, it may be too late. or, it's possible that they could phase in the tax cuts over a period of time, or it's possible that something could be written in to protect enterprises in conservatorship. so all of those are possibilities, but they are possibilities at this point and we have to be realistic about them and evaluate them so we are constantly making that kind of evaluation. the other regular kind of fluctuations that lead to quarterly losses is just gap accounting principles, how you account for hedging against risk. and those are things that have nothing to do with whether

you've extended good or bad credit. they're non-credit related factors, but they founs the enterprises losses around regularly. so going to zero in a buffer could, in any quarter, put us into a situation where we could end up having to make a draw. >> thank you. let me switch to a sort of an ohio-specific question but one that could have impact moving forward in other places. in ohio, investors in the gse bulk sales use land contracts, as you know, known as contract for deed to generate income off these properties. these contracts offer non of the protections of a mortgage because obviously they're not a mortgage. they often leave borrowers with properties that are inunhabitable, that's happened in cincinnati, it's happened in cleveland. you have the, my understanding,

the authority to be able to do something and my question is pretty simple. you prohibit bidders on npl sales and prohibit it on any single rental family sales going order in. >> we will certainly look that the ranking member brown. we have changed the requirements a couple of times, but we never changed them retroactively. we always change them perspectively because people who have brought u bought these non-performing loans have bought them on a set of fixed assumptions that -- and criteria and tlarmts we've imposed on them. so it would have to be on a go-ford bag go-forward basis but we are looking at that issue right now. >> thank you. >> thank you. senator corker. >> thank you. mr. watt, thanks for being here today, congressman. what do we call you now? >> medical.

>> -- mel. >> mel. that's what i thought but i didn't want to do so in front of other people today. thanks for coming and thanks forts job you're doing. i know we've had some conversations row lent sently and i want to reiterate it's your belief as we've had in multiple conversations that the future of housing finance reform is totally congress's job do and you're relying upon us to make that happen and i think you know there's some -- there's sort of a lefty think tank and a righty think tank and some in the middle folks that appear to be coming together around some conclusions. and it's my sense that the chairman and ranking member wish to take that up in the near future and from your perspective that's our job to do and that's how we determine the future of these entities. >> i absolutely agree and i hope you heard me loud and clear, unequivocally as that role of congress. now, we have made some reforms to the enterprises, and i don't

want those disregarded because they're important reforms that we have made during the conservatorship process. and i've outlined a number of them in my longer form testimony. i didn't have a chance do it in the short period i have in giving an opening statement. but they are outlined specifically in my longer form written testimony with links to the details about them. so that's, in a sense, could you think of that as gse reform and think of what the committee's responsibility and congress's responsibility is housing finance reform. i don't want to get into semantics here, but i just want to -- >> we don't have any issues with the steps you've been taking and we appreciate you informing us of those. the issue we obviously had a recent conversation at the end of last quarter regarding the building up of capital within the entities, and the reason we

did that was that was a pretty big change from where we've been. the two entities have $258 billion worth of capital available to them, so there's -- i mean this whole notion of them running out of resources is -- it's just a baseless issue. and i don't know why that even at this time is being discussed because what it does, mel, is it changes the dynamic of what's been happening. it makes it appear as if there's a different approach that's being taken by the administration. the administration is working with us, we're working with others to move ahead and reform, but all of a sudden a unilateral step by you when they've got $258 billion in capital available, you know, i ran a pretty large company that i started and, you know, our money went into overnight repos and we kept no cash, none. each day when we need today we drew it out and in essence you

have exactly that same type of thing available to fanny and freddie, $258 billion worth right now. and so to act as if drawing on this made-available credit when the u.s. taxpayers already are 100% the backing of these entities, it just creates a different direction which sends a signal to the world that something different is occurring when it's not. so i hope we've established today that you've got $258 billion available if you draw upon it that's ha it's for by the way. it in no way affects the credit or anybody's perception of the securities that are being put out. >> senator, i hope you -- i tried to address that as forthrightly as i could if my opening statement. i've addressed it repeatedly. but i hope you heard the analogy i used. you all gave me these cars to

drive for five years, you said keep them safe and sound, you said make them efficient. if there's a risk that -- that a draw or a reduction in the commitment that backs these enterprises would interrupt the market, it is small, i acknowledge that, i'm not -- i'm not trying to overstate it. >> yeah. >> but, it -- if it happens, and what i -- and what we say is reasonably foreseeable could happen, it won't be you that they come to and talk to about it, it will be the conservator because we are the responsible parties for this during conservatorship. you're the responsible parties for it going forward. >> yeah. why don't you go ahead and draw 10 billion ton right now and see. i'm telling you it's going to have no effect. >> will don't need to draw $10 billion on it.

>> do it anyway. >>. do it anyway. i just -- >> i would not do that and run that risk because that would expose me to the same risk that -- that i'm trying to avoid. i just don't understand why -- why -- well, i don't -- we've had this conversation before, but believe me, i can't afford to take that risk anymore than i could afford to drive a car that has a recall on it with an air bag with my family in it. and i've tried to make that analogy for you, that's my responsibility and i have to live up to that responsibility as conservator. that's what you all -- that's why you all approved me in this committee to do this job. and that's white senate confirmed me to do this job. so i don't know what else i can say about that. i can't afford to assume that risk, you can afford to say it's

theoretical, i can't afford to say that i will assume it. >> well, it's one of the most baseless arguments i've ever heard. any company in america that had access to a $258 billion line of credit from the u.s. government, backed by the u.s. government, i don't think would be concerned about market fluctuations. but something's happened recently, i don't know what it is, but -- >> it could get into a discussion about whether that's adequate or not adequate, i don't know, for a $5 trillion portfolio. you know, you don't know what -- you know, and i'm not saying this is a large risk, i'm just saying i can't afford to take it as conservator because i have responsibility for it. that's the point i keep trying to make to you. >> thank you. senator tester. >> thank you, mr. chairman.

a number of things, you talked about in your opening comments that you've been moving towards sharing with the private sector and you have. do you have a figure that would be appropriate as to how much -- how much of the portfolio should be put into private versus -- versus taxpayers? >> we have a goal of risk sharing on at least 90% of the single-family new loans that fit our criteria. and that's a substantial part of our portfolio. the goal, obviously, would be to transfer as much of it as you can. >> you think 90% a's attainable >> in normal times, actually we

have exceeded that goal since we set that goal, but the problem is, if you -- if you require it and there's a downturn and investors walk away, then you are -- you've made us have to adjust the price down so we are subsidizing the transfer and we don't want to do that. that's why i say we always do it based on rational economic decisions. so i don't have any problem with a goal, the problem we have is when you write that and say you must do it, it really -- it really is an impop sigs into the market that is -- that is neemger justified, nor is it in our opinion reasonable to do that. >> okay.

so i think -- i don't want to speak for everybody, i think a fair number of folks on here want to see private capital go in to take the risk off the taxpayers. >> and we do too. >> so the question is, we want to make sure that you or whoever's in your position is as active as possible to get private equity into the -- into the -- into the entities. the question is, how should it be written so as not to tie your hands but yet make sure that you maintain aggressiveness. >> i think it would be appropriate to set a goal and -- and to give us flexibility based on the criteria that we've talked about. so i mean, we -- we share the goal. >> yeah. >> of doing that. but you could easily get into a situation where you are requiring us to make noneconomic decisions if -- if you say you

must do it regardless of the economic circumstances. >> okay. do you think it's possible to have the third-year note without an explicit government guarantee? >> senator, i think that's probably more into the housing finance reform area than it is for me to say because i could just give you my personal opinion. >> i want to hear it. >> which is not worth much. >> it's worth a lot. >> i really try to keep before doing personal opinions. >> i think it's -- >> as opposed to express ang opinion of our agency. and we have not developed an opinion on that. >> okay. well, i mean, i think your opinion does mean a lot, quite frankly, because you're in the business a lot more than we are. we're depending on you in that regard. >> let me put it like this. i have read a number of experts in this area who do not believe it would be possible to do.

>> okay. >> and i presume they're credible arguments on the opposite side, but i don't know. >> i want to talk about the buffer a little bit, the buffer i believe is an agreement through treasury? >> it is, yes. >> okay. you said it will be down to zero by 2018, which is coming right up. and by your opening statement you indicated that you think you need to have a buffer? >> yes, sir. >> how much? >> well, it could vary because the objective is not to make a draw. >> okay. >> so we want to cover first normal fluctuations in operations. we want to monitor what's happening on tax reform because that could have a major impact. >> okay. >> short-term on our loss situation. >> so give me a ballpark figure on how much. >> it's -- it's just hard for me to do that, senator, because --

>> so let me ask you this. has secretary mnuchin or anybody from the trump administration have you approached them or have they approached you about a buffer amount? >> we have had discussion with the secretary of tresh you'rery, you have them before you next week and i think it would be more appropriate for him to talk about. >> did he give you a number? did he give -- >> not a specific number, no. >> was he owes posed to a buffer at all? were they going to stay at the zero or did they talk about it at all? okay. my five minutes support. pu thank you mr. chairman. >> senator ask the. >> thank you, mr. chairman thank you for holding this very important meeting. director watt thanks for coming out this morning and sharing your thoughts and your views at the agency. >> good to see you again. >> you too, sir. not on an airplane so this is good. director watt you may know that south carolina is a state where about 1.4 million people live in disstressed communities is one of the reasons why i've spent a

lot of time on what i call my opportunity agenda, looking for ways to help folks leave those distressed units and really experience their economic potential. and much of climbing the economic ladder in this country, most of us actually would even suggest that living the american dream means owning your own home. and i think the reality of it is getting there is critically important to not think there's ways for to us help folks get there and do it in a way that's logical and responsible. i know that there's been a lot of conversation around the fact that today we are seeing the lowest first-time home buyers since the 1970s. multiple years in a row we saw a decline in first-time homeowners and we know that those folks living in distressed communities are the folks who are disproportionately representing those folks who are not able to climb out and experience

homeowner ship for the first time. we also know that the difference between the net worth of americans can often times be seen in the equity in that home. a renter's net worth is somewhere around -- under $10,000, according to consumer finance report, and foreign policy those who own their home it's near $200,000. so at least 20 times more. and so the question is, how do we help those folks who are paying their rent on time, paying their utilities on time, use that data and evaluating their desire to own a home? so according to statistics there are about 26 million people who are credit invisible because the models that some use have not been updated to the latest model. i know that you have, i understand, been considering updating the credit scoring model the gses accept. you can tell me how much progress you've made in that

direction and what your thoughts are on going from what is for the most part an ant ta kuwaited system that leaves so many millions of americans without the creditor worthiness to start the process of buying a home and what you think about heading towards that newer model sooner than later? >> senator, we have set as an objective to try to get through this process by the end of this year. >> good. >> but i also tell you that we thought it was going to be a lot simpler than it has turned out to be. in the primary reason for that is any time you -- you start talking about changing the credit scoring models, you set off a whole sequence of events that are very costly for people to change.

and changing back and forth between competing models is very difficult for the industry to do. so -- and so we've spent a lot of time trying to figure out what impact there would be to going to a new model. we know that new models will take into account different considerations. the enterprises themselves and they're automated underwriting systems are trying to take some of those factors into account because unlike what most people assume, the enterprises don't always rely on credit scorers to

make these decisions, they -- they are factors in making these decisions but they have independent evaluation to automated underwriting systems that can make these judgments. so we've been aggressively asking them to do the innovation that's necessary, but not be irresponsible because part of the reason that people -- a lot of people are having this problem is that their credit was so damaged by bad loans that they got involved in before that they couldn't -- they just haven't able to dig out. so it's a multifaceted problem. >> chairman has just helped me realize that even on the banking committee five minutes is still five minutes. i'm going try to stretch that a little bit here. i'll say two things. number one, the fact of the maerlt is if you're paying your

rent on time, your utilities on time, your cable on time, cell phone on time, that is necessary information for making a credit decision. the primary predominant way that someone buys a home is their credit score. about 76% of south carolina ians can be scored. if we were go to the new model we would see another 16% of south carolinaians being scored. if you're not using the most current model it's very difficultor 16 percent, nearly 900,000 south carolina ians to be scored. thank you. >> thank you. senator cortez masto. >> thank you. director watt i'm going to talk to servicing standardstor start. how are you? the new senator from nevada. >> good morning. >> great to have you here. so servicing standards.

fhfa has done quite a fwoit improve the servicing standards but i think we haven't gotten to the core of the problem. in 2011 fhfa released a white paper looking to overhaul the way the pay servicers but did not complete work in this kase space. the legal settlements and gse rules they still stand to profit from default and foreclosure whoil services are costly. servicers have an incentive to extract fees from homen ariesnd investors and homeowners are powerless to fire their servicer if they aren't satisfied. do you agree that we still need to address the way servicers are paid so that they don't profit more from foreclosures than from keeping families in their homes? and then let me follow up with a second, is fhfa going to do further work in that space or is this up to congress if we are undertaking housing refinance reform?

>> answer to your first question is, yes, i agree that -- that something needs to be done in the space, it's a serious concern. we cannot do it alone as the enterprises because lenders have servicers and they are -- the bulk of the people who compensate services. so if we -- if we try do it alone, we just wouldn't be able to get there without their consultation. i don't know that legislative that there's a legislative solution to it, but we are working aggressively with the industry to try to -- to try to get through this problem. servicing used to be just

collecting mortgage payments. during the crisis, it became a much, much more difficult exercise and the compensation didn't necessarily follow the complexity of it. so the industry's got to catch up on that. of course now we're moving back to a more normalized time where it might not be as work intensive as it -- as it was during the crisis. so all of those factors go into evaluating how much you are going to pay a servicer for servicing a loan. that's the collection of the money which is easy if people pay it on time, it's just an accounting thing. >> right, i don't mean to cut off, but i get it because nevada was ground zero for the foreclosure crisis and servicers are more interested in the fees and costs that they could get

from the foreclosure than they were actually making sure that the loan was performing. so i think we need to address that compensation structure for servicers. and i'm hoping you're committed to helping us do that. >> certainly. if you can find a legislative solution, i would certainly work aggressively with you to try to help because there's definitely movement needed in this area. >> now let me ask one other question because i know my time's running out. community banks. some of the upfront credit risk sharing deals under taken by the gses in recent years have benefited large banks that use a vertical integration model. the big banks originate the loans, they sell the risk off to the market. one concern that has been raised about this structure is that if it is scaled up too much, you may end up choking off small lender access to the mortgage market. in other words, small lenders can't compete because they don't have large scale operations or

securitization affiliates. as congress contemplates the next phase for gse reform, do we need to be mindful that credit risk sharing deals particularly those involving upfront risk sharing don't box out small and community based lenders? >> we definitely need to be aware of that and we are aggressively working on making sure that that does not happen, because one of the things we tried to do during conservativeship is making sure large and small lenders are treated alike. >> great. >> and that should also be true in the credit risk transfer space. >> thank you. and thank you. i know my time is up but i will submit additional questions for your response as well. thank you. >> thank you. >> thank you, mr. chairman. and director, welcome. it's good to see you on this side of the capitol. thank you for your service and for being here this morning. you and i recently discussed the

issue of residential property assessed clean energy loans referred to as pace lanes since they get super lane status through local tax systems and how they effect the housing market. arkansas doesn't yet have these residential pace loans but many other states do. these loans are unusual, not only because they're liens because also because lenders are not following truth and lending act requirements. as a result, these loans are often high interest, up to 12% for 25 years. they include home liens that jump priority even though these loans come after the mortgage. they contain no federal disclosure or underwriting and we've seen several examples of severe consumer abuse. for example, i'm aware of a case of an 86-year-old widow on social security dealing with severe dementia who was giving a pace loan for more than a $100,000 and she may now lose her home.

to address this scandal, brad sherman and the house of representatives and i have introduced legislation that would clarify that the truth and lending act applies to pace loans. i'd like to discuss with you fannie and freddie's positions on these types of pace lanes. do fannie and freddie repurchase mortgages with pace lanes attached. >> we have a policy against doing that, the problem is these liens are put on after our loans are already made and they jump ahead of fannie and freddie's lien position which has been our primary concern. and also they show up in the tax office not in the land registry office, so even after they're put on after we have made -- bought the loans that were superior to them they jump ahead then we don't get notice of that so that we can adjust for it.

so they're multiple problems. your bill would, i believe, address or start to address some of those problems but our primary concern is that -- something that benefits a larger wider group of people, not a single homeowner. and -- and this runs counter to that -- that theory because it treats them as -- as a superior tax lien which we have already taken into account any time you make a loan, but then you come back and you might put a 25, $30,000 renovation for efficiency. it may be worth that, it may not be worth that. but we don't have any alcohol over that and it is really --

really created a serious problem for the mortgage finance industry and so we prohibit it, but their limitations to even how we can even find out about them. >> thank you very much for that, director watt. so my legislation and representative sherman's legislation would address the consumer facing problems that you have often times vulnerable consumers being exploited by predatory lenders, by applying the truth and lending act. even if that act passed, you would still have the separate issues because one, it's a super lane that takes over your first priority mortgage. two it's retro active after those mortgages and three it even occurs often times in a separate record system, the tax system versus the land registry system. even if we addressed the consumer abuse, you would still have the problem of your financing system which could create broader problems of la

kwidty is that right? >> you're absolutely right. i'll give you another little piece of information. there's no ragsnal reason if you think about it why a superior tax lien would be having an interest rate of 10, 11, 12% when a lean subordinate to it is going at 4% or 5%. that's the market rate. so there's preferences here that are really -- it's just not -- not something that's working in the marketplace. >> thank you very much for protecting the taxpayers from what really is a scandal lus program. we're trying to protect consumers but there are real problems that the pace loan system creates for taxpayers as well. i hope you preserve that system.

i've talked to your counter parts about this program, see what we can do to rein in these abuses. >> director watt, welcome. your service is exemplary. i wanted to take this first opportunity the full committee's has had on the question of housing finance systems to lay out a few principals that i think are important. one is to have a system that ensures broad affordability and access including for those homeowners in high costs states like new jersey. strong mortgage servicing standards that were to keep borrows in their homes and foreclosure prevention options that provide homeowners with modifications. the protection of taxpayer dollars, equitiable access so we

don't overconcentration the market and clear observations to show low and moderate income borrows to support the preservation of affordable housing. i want to look forward towards work with those goals with those who have similar views. my home state of new jersey continues to struggle with underwater foreclosures and from 2007 to 2016, 85,000 new jersey residents lost their homes to floerz. 3.2 million homes around the country still have underwater mortgages including more than 9% in new jersey. in 2014, fhfa announced that it freddie mac and fannie mae would sell off loan in order to reduce risk to taxpayers and help families stay in their homes. the enterprises have sold off more than 11,000 loans in new jersey and they are recent plans to do more.

so i was extremely pleased in march to see the new jersey community capital win the bid on community impact pool of 158 loans in new jersey and new york area. in my mind it's clear that community oriented organizations, like new jersey community capital with vested interest in the neighborhood, improvements can achieve outcomes that mutually benefit borrows, distress communities and the enterprises themselves. what i want to know from you is what fhfa and the enterprises can do to provide greater access to loan sales for community oriented institutions, like new jersey community capital, or better position today help borrows stay in their homes and i understand that fannie mae's prohibited from entering into direct sales of assets but it could offer pools for nonprofit bidders, for example. given the proven tract record like an entity of new jersey

community capital, so i'd like to hear what you think can be done better and i'd like to encourage fhfa to pursue loan sales exclusively for nonprofits. >> this is an area we've done a lot of work in and to be clear, one purpose was to get risk off the enterprises books but a more important purpose was to get these loans into the hands of people who had more ability than we had fannie and freddie had because of our statutory limitations to do the kind of innovative community preservation and stabilization work. so we've always had as an objective trying to get these loans to people who are responsible, which is why we've gone back and changed the criteria for bidders to write in certain requirements that they

have to comply with whether they are community based or whether they're big purchases. so what we did is we've reduced substantially the size of the pools because the biggest impediment to nonprofits is just that nonprofits generally are nonprofits. they don't have money. and so you need -- you need money to buy these nonperforming loans off of our books. we are statutorily obligated not to give them away. we can't do that, so reducing the -- >> that's not what i'm arguing for. >> i understand. reducing the size of the loan pool was very critical. in fact, i think eight or nine of the community loan pools have been won by the organization in

your state. so -- and i'll tell you what else we've done. we've met with local governments who were writing to us or state governments who were writing to us saying you should quit selling these loans to big wall street firms and our response to them is, okay, if you would buy them, you have a vested interest in community stabilization, you're closer to the community. we can identify the loans in your state and you could -- you could help the nonprofits or you as an entity as a state or local government could -- could get into the space and we're close to -- to dealing with -- with the state of new york because the bulk of these loans really are in florida, new jersey, new york -- you know, five

states are where the bulk of them are. so we're trying to be as aggressive and innovative as we can be because we share the objective of getting them and having these decisions about stabilizing communities made as close to the neighborhoods as the decisions can be made. >> we'll look forward to working with you and suggesting some other ideas to achieve that. it's also not only about community stabilization, in many cases it's also about the reality of communities of colors being able to have a place to continue to call home. thank you, mr. chairman. >> thank you. we're going to work through the roll call which just begins. senator crapo will return shortly. >> thank you, senator brown. mel, it's good to see you. you wouldn't remember this or necessarily know it but the first congressman i ever met was you in 2004 when i was a cor kneelus commissioner and you were very gracious and attendantive in our discussions

we had in your office. i remember that well and i appreciate your indulgence there and now. >> i'm still one of your constituents. >> i know you are. born in steel creek. and mel, can you -- i think that you were right in the position that you took that it's -- we've -- we've got to come up with the solution, but i have to believe that the work that you've done, you mentioned in response to one question that you've implemented enterprise reforms that -- that the best way for us to get to a bipartisan something that ultimately comes out of congress is to be very much instructed by the views of the white house and the views of your organization in terms of boundaries or priorities. do you agree with that and what would you envision is a good first step so that we've seen proposals over the past couple of years, they haven't moved forward, but to kind of get a

universe of what the good ideas are and maybe some things that wouldn't be based on your own on the ground experience, could you talk about that a little bit? >> i've gotten a lot of criticism because i took fhfa out of the housing finance discussion because it seemed to me that our role was to manage the enterprises and conservativeship and what i be affectionately called the here and the now. so we've never developed an agency position on these things, but i agree with you if somebody asked us to do that, we have a lot of experience, it's just not in our statutory mandate and -- and i haven't wanted to, you know -- people get critical when i get out there and start advocating for -- for certain

principals in housing finance because i haven't been asked to do that and it's not part of my statutory mandate. >> i admire the fact that you're staying within the lanes. it's not necessarily always the case in every agency, so i appreciate that, but in this case you have expertise that i think would be very helpful and rather than drilling down on the details, two minutes and 30 seconds left -- >> if you all ask me to do it, i would try to do -- be more aggressive in that space. >> i think it would be helpful particularly when you have discussions about where do we go forward with gse reform. the instate of fannie or a freddie or some newly combined institutions, those sorts of things i think would be very helpful to get your insights in the role that you played over the past few years and we're going to need that help. i do have one question that really just relates to the

delay, the recent delay in pushing back the -- i think it's the underline css system. there are some who have expressed concern that there may not be a commitment to moving forward with that, but i think that even in your written testimony you said when, you didn't say if, so it's your intention, it's just a matter of you working for technical difficulties. >> absolutely. this is a major, major undertaking to build that platform and we've learned a lot and we've tried to stay on a schedule but -- nobody should read that we're not committed to the csp. >> with the delay do you feel like the push back to 2019 is an achievable, how would you rate the soundness of that

implementation? because as you know the industry, a lot of other stakeholders have to invest a lot of time in it and planning and trying to get some idea whether or not that needs to be relooked or if that's a relatively sound plan for moving forward. >> i think it is sound and i think we actually built a little -- little leeway into the time line because we didn't want to go back and reextend again, so we built in some time. we just -- we just added actually six more months. >> to end of '18, '19? >> right. i think -- i think we'll be ready and it's critically important and it's absolutely necessary to get to a single security which will save the taxpayers a lot of money. we'll help support the tba

market and increase liquidity in the market so there's no question about that. we're absolutely committed to it. >> thank you and with the chair and the ranking member be discussing how we can actually engage you to get you to a point where we're fully harvesting your knowledge and expertise and opinions on how we move forward, because it's going to be critically important if we're going to get a bipartisan solution that actually fulfills what i think is our obligation to move forward with reform. thank you. >> thank you. >> thank you, senator. senator donnelly? >> thank you, mr. chairman. and i want to say to my dear friend congressman watt and director watt how pleased we are to have you here and what a fine done you've done in this position. we're grateful for your service to our country. >> thank you. >> first on the quarterly dividends to treasury and i know you're going to start putting a buffer in as well that you had talked about earlier. do you expect that flow will be positive for the foreseebable

future as you look at the markets? >> i expect it to, yes, but, you know, there's some factors that i outlined in my opening statement that could adversely impact that and especially when it's done on a quarterly basis, those fluctuations can be exaggerated. >> one of the areas for my state that is important is manufactured housing and i've encouraged your agency to finish the duty to serve rule because i think it will increase affordable home ownership particularly in rural areas. the pilot channel program for manufactured housing is a good start but i encourage you to expand those efforts and i'm encouraged that the duty to serve is making progress. how do you see that rule impacting manufactured housing particularly with chatle? >> i think having a duty to serve rule and approaching it in

the way we are approaching is the responsible way to do it, to do -- it's an area that fannie and freddie have not been involved in, certainly not in the last eight, ten years during conservativeship. and it's a specialized market and we have to -- we have to get involved in it in a responsible way and i believe that if we do that, the standards for the industry will actually be raised and -- and -- so we're just pushing the -- the two enterprises to look at ways to do this responsibly. don't just wade in there as some people wanted us to do and try to do the same thing in the

chatle space that we do in the fixed housing space, right? >> um-hum. >> because they're different challenges and different obstacles and they're different risk associated with it and we have to be -- we have to responsibly assess those risks and be able to meet them and price them appropriately. >> when you look at affordable home ownership, which i know has always been one of your cornerstones, various legislative proposals we've heard have been offered that would change the gses from the current status. if the wrong changes are made it could endanger the american dream for middle class families who could be priced out of a mortgage loan. do you share concerns around the 30 year fixed rate mortgage that those changes could make that more difficult or could lead to higher interest rates and make it harder to borrow?

>> i think 30 year fixed rate mortgage has become a standard for american homeowners and it's important to retain that. how it gets retained or what is necessary to retain it, i think is a subject that this committee and congress will have to address, but i do think that it is an expectation that american people have because it is always been there. >> um-hum. what are the changes to the current system that worry you the most in terms of maintaining accessibility and affordability that you've heard? >> well, i think most -- a lot of the plans that i have seen have some elements of trying to protect affordability and i do believe that that is important

to do and i think the american people believe that it is important to do. so -- how that gets done and how it gets structured in a -- in housing finance reform, i think is more in -- in the housing finance reform space than it is in the -- in the conservativeship. >> i want to commend you for your leadership, for your steeriness into a very stable, solid position that you've done a strong job in trying to follow the mandates that are there and you've taken a terrific leadership position and, again, i want to just say how grateful i am for your friendship as well. >> thank you so much. >> thank you, senator donnelly and director, you may have seen everyone disappear here. there's a vote going on. >> i was aware of that.

>> so i do expect some senators to return and while we're waiting for some of them, i'll take another turn at questions. i want to return to the issue that senator corker discussed with you. as i understand it, according to the preferred stock agreements, treasury has committed to buying senior preferred stock to ensure that freddie and fannie maintain a positive net worth and there's currently $258 billion under these agreements that can be accessed. senator corker, i don't want to speak for him but as i understand his point, he's saying that the markets know that this agreement is in place and that this option for the certificateship is available if there is a problem as you have described potentially could come. i understand you to have concern about whether -- i guess what are your concerns about using that option to deal with a problem if there is an issue that arises?

>> i think, mr. chairman, when you say the markets know, i think if you ask most people out in the public, there is -- there is actually the opinion that there's an unlimited guarantee to -- to this space and that's not true, and if you continue to erode the amount of the backing, i think that becomes more apparent to -- to investors and it runs the risk that it could start to have an impact. and that's all i have said. >> sure. >> and -- and so i think it's important not to draw more

because, if you draw more, it will reduce that -- that explicit dollar amount of backing. it's already out of whack -- it's already out of whack because if you look at it, freddie is substantially smaller than fannie, but freddie actually has more backing than fannie does. >> so let me ask you, in that context then, what is the solution? is it to stop sweeping as much as -- would you recommend the treasury agreement for the sweep be adjusted so the buffer could be created? what would you think would be the appropriate way to protect against this problem? >> i think there are -- there are several options that we can look at that are -- they're not legislative options, because the pspa is a contractual agreement and i think the appropriate

conversations about those options really need to take place between us and the secretary of treasury. the problem is that if the committee sends to the secretary of treasury the message that this is a no, no, to have those discussions or to try to resolve this in a coordinated way, then it leaves us -- it leaves it to -- to us to have to unilaterally deal with it, which is something that i would prefer not to do. >> which gets back to the dividend question. >> right. but there are ways to address this by minor adjustments to the pspa, and that's not a move toward recap and release. it's not an invasion of the per rogtives of this committee, it's not an invasion into housing

finance reform, but we have to have that leeway to do it and if -- if the two of us don't have it, it's a bilateral agreement, if -- if -- if the two parties can't dance, then i have to -- i may have to dance by myself and that's -- that's not a pleasant position to be in, but -- and it may not be pretty, but -- but -- but i have the ultimate risk here is the point that i keep trying to make, which is why i made the analogy to the -- to the -- to the -- to my automobile and the -- and the collision bag. somebody has to assume that ultimate risk and right now, unless we can assume it together, it falls on me. >> when you say we, you're referring to you and treasury?

>> that's correct. >> i appreciate what you've reiterated several times in this hearing and i'm going to restate it that any of the moves that you ultimately make whether it be agreements with treasury or a unilateral move which i do not believe you should make, that those are not moves toward recap and release. i think. >> they're -- i made one important points today. >> that point is made and i appreciate it being made. >> all right. >> i also believe that this conversation is -- puts a highlighter an exclamation point on the other point -- one of the other points you made is that we need to move expedition deliciously in long i think it really highlights that, that concern. that being said, i just want to delve a little deeper and clarify. i'm hearing you say that you

feel -- tell me if i'm understanding you wrongly, that you feel that a draw on or a -- an action under the current agreements to sell additional preferred stock to treasury to keep that buffer in place should we end up in a problem is a less preferable option or would be received less favorable in terms of its market impact than an adjustment to those agreements entered into mutually between you and the secretary of treasury, is that right? it seems to me that we have some preferred stock purchase agreements in place. if accessing those terms of those agreements is going to create market unease, would adjusting those agreements not also create market unease? >> not to deal with a short-term law situation. this is -- this is just about dealing with a short-term

possibility of a loss and -- and -- i don't think the market would react to that. i think -- you know, from everything i've heard, senator, this reducing buffer was designed to put pressure on congress to do housing finance reform. it was a three year, $3 billion down to, you know -- it just went down, but if it gets to zero, there's no buffer there. there's no -- there's no operating reserve that we can rely on. we would have to make the draw. >> i understand that. >> and that would be, i think -- it could be and i shouldn't say it would be, it could be unsettling to the market and we can't, as conservativer afford

to have that happen because then you start to adversely effect the pricing of mortgages, you run the risk of having liquidity issues in the market. >> i understand. >> now it may be far fetched, it may be -- but -- and people can talk about it in theoretical terms. >> but you're concerned about the impact. i tend to agree with senator corker and perhaps the conversations you've had with me and him today can help to allay that worry in the marketplace that your -- utilization of the terms of the existing agreement should not create any undue concern. that being said, i understand your point and i think it just highlights that both you and the secretary of treasury need to work at this and we in congress

need to work on getting a permanent solution in place. >> you do need to understand, mr. chairman, though that a term of the existing agreement gives us the authority to either declare or not declare a dividend and that's not what i'm lobbying to do. i think a better solution to this would be a joint solution. >> i agree with that. that's what i was getting to in my earlier questions. thank you for that. senator heitkamp? >> i'm going to go back to the 30 year fixed rate mortgage. don't sigh so heavily. i think -- i just want yes or no questions, mel. do you believe that a federal back stop is necessary to ensure a 30 year fixed rate mortgage? >> i'm sighing because our agency has not developed a

position on that and so any opinion i could give would be my personal opinion and i have -- since i took this position just aas i saidusly stuck to the notion that i should not be expressing my personal opinions as opposed to agency opinions. >> i will tell you one of the greatest challenges we have in my state is housing, whether it's rural housing, whether it's -- it's affordable housing across the board. i've done economic round tables, economic development round tables, number one, housing. access to housing, affordable housing. we can't have rural development without housing. we can't have economic development without housing. we need a workforce and that workforce to come to north dakota needs to make sure that they can afford their house and afford a place to live and live in good neighborhoods. i understand the sigh and i probably know what it means, but the next question is in the

absence of a federal back ststo what options would the middle family have for getting access to a home loan? >> again, i think this committee would have to define those options and i want to go back and reemphasize my position again. my responsibility as conserve tor is to manage in the state that we have now and that's what i try to stick -- stick to my knitting as they say. i think when you get into defining what will be necessary in the future, that's housing finance reform and i think it's congress's responsibility to do that. so i just -- i don't mean to sound like i'm trying to avoid the questions that you're asking, i just -- i don't want

to be criticized and once i left congress, i didn't think it was my prerogative any more to express personal opinions about how legislative things needed -- needed to be done, and especially as long as i am the director of an agency, which is not developed an agency position on it. >> when will you develop an agency position on this? >> well, we wouldn't unless you all ask us to do -- >> consider this a request. >> it's not in our statutory mandate now to do future stakes. >> so maybe we can get to this in a different way and i would ask you, whether your agency has conducted any analysis of what complete privatization would mean for access to mortgage credit and corresponding impact

on middle class families? >> i don't think our agency has conducted formal research on that. we are aware of literature and we obviously have people in our agency who probably have great expertise and could develop -- >> i think that's the point. the point is your agency does have expertise. no one in government knows what's happening in the mortgage market, knows what's happening in affordable housing and i include hud in this, knows what you know. you see it every day. you have the metrics. we need advice. we need information. and we're going to have a choice here. we're going to have a choice on whether we're going to take that all-important provision of the american dream, which is home ownership and make it completely inaccessible for middle class families. and that is a major initiative for us and it's a major concern, and so at some point here, we do need to have some analysis using the data you have on what works

and what wouldn't work. we can listen to the mortgage bankers, we can listen to the lending community who express great concern about complete privatization. i think we had a proposal here starting off corker/warner then crapo/johnson. but i think we've got -- we've got to have your advice and so you can't play coy on this and i know -- >> we're not being coy. >> i'm not saying that as a practice jurortive, you've got to engage and give us advice and data that's going to help us make decisions. >> we regularly give technical advice. any proposal that comes out, we will say, look, if you do this it will have this impact. >> so i just asked you, if we completely privatize, what's the impact? >> if that's a proposal that's out there. >> it is out there. >> well, it's out there -- i'm

not sure it's out there on this side of the capitol, it may be on the other side of the capitol. >> i'm over my time, mr. watt. i'm sure we'll have more conversations about this in the future. >> thank you and senator shots, i apologize. it's your turn now. >> thank you. i want to talk to you about the role of fannie and freddie and financing multi-family housing and for providing affordable housing. it's often overlooked when we talk about housing finance reform. i'm aware that fhfa has been making an effort over the past few years to realign fannie and freddie's with their core mission helping rural communities this includes their work on financing multi-family housing. have you seen progress in motivating gses to finance more

affordable multi-family housing for low-income families? >> yes. when we cap the amount that they could do in the -- in the upper end and said you can't do any more because then you would be taken business away from the private sector, they turned substantial amount of attention to the affordable space. and so, yes, we have seen substantial progress in that area and i think you will continue to see progress. i'm glad you focused on this because a lot of the questions sometimes assume that our -- that our responsibility is fhfa and fannie and freddie's responsibility is only in home ownership. it is actually in access to affordable housing and we're supposed to be agnostic really about whether it's home

ownership or rental. obviously because most people think the american dream involves home ownership, there's more emphasis on that but we're playing an active role in the affordable rental space and the private sector is playing a very active role in the -- in the other part of the rental space. we control the amount that fannie and freddie play in that space. >> so there's a lot of talk on this committee and elsewhere when we talk about housing finance reform about the macro aspects of this and i want to drill down on what we can do to build more multi-family units, apartment buildings, rentals, whatever it may be because it strikes me that -- that hidedy and i have the same problem and yet our states are so different and i see chris van hollen from maryland nodding as well. this is a problem in every state

rural and you're been and in every part of every state. is there more that you can do administratively to push in this direction and is there any statutory impediment that we might be able to work on as we do reform? >> i don't think we have statutory impediments in this area. the one thing we have done to -- to get more aggressive in this space especially in rural communities is -- is the duty to serve rule, which obligates the enterprises to take aggressive steps to serve underserved areas and a lot of the problems in this space, in underserved rural areas because fannie and freddie have not been backing

manufactured housing, they don't do chatle lending, so the duty to serve rule is forcing them to look at in a responsible way how you might -- how they might be able to do more with manufactured housing, which is -- you know, it is a major part of the housing stock in -- in -- especially in rural areas. so if we don't -- if we don't do something in that space, then we're missing an opportunity to support housing for people in rural areas. so that's -- we finally got the, you know, the legislation was out there since 2008. a run was made at putting a rule

out there in 2010 and then it was -- then it was put on the back burner. we finally have finalized the duty to serve rule and the first plans proposed plans for the gses have come forward in the last two weeks, in fact. >> thank you. >> thank you. senator van hollen? >> thank you, mr. chairman. director watts, it's great to see you. >> good to see you. >> thank you for your service in the congress and your good stewardship at fhfa and i want to thank you for exercising good and prudent judgment on behalf of the mission that you've been entrusted with. we all know that families across the country are absolutely devastated by the financial meltdown. 5 million americans lost their homes and the recoveries been

uneven. if you look at my state of maryland, some of our rural areas, they're still not fully back on their feet. they're facing challenges of access to credit, foreclosure mitigation, neighborhood blight. can you talk a little bit about the tools you have at your disposal to address these issues and if you could also take a moment to discuss the progress we may be making with the neighborhood stabilization initiative in baltimore city? >> well we started be neighborhood stabilization with detroit, chicago and one other and then we expanded it substantially in one of the places we expanded it to was baltimore because -- and we just went down the list of the most vulnerable neighborhoods. we didn't do this, you know, just off the top of our head. it was done very scientifically. so i think what that does is, it

gives fannie and freddie more latitude in how they dispose of properties in vulnerable neighborhoods. it gives them the opportunity to work with nonprofits who are in the community and in some cases where it's going to cost them more to go through a foreclosure process than the property's worth, it gives them even the opportunity to contribute housing. it has to be a financial decision, obviously. >> um-hum. >> so i think we're making progress in all of the cities that we -- and they are primarily cities because they were high concentration areas that got hit very, very hard in the -- in the crisis. >> yeah. thank you. i look forward to working with you and your team on that especially in maryland.

a question about the national housing trust, because one of the things the state of maryland and some of our counties have used very effectively is the idea of housing trusts and of course to be effective housing trusts really requires source of dedicated revenue, so that they can make decisions with their development partners and allow these projects to be capitalized in a timely manner. last year we saw i believe the first installment of funds from the national housing trust, fund dollars. can you talk about the importance of that fund and give us a sense of how you think it's going to be capitalized going forward? >> well, it's on the statutes now and it was suspended administratively and i took a lot of heat for reinstating it, but it was a statutory mandate

and i didn't see a reason not to follow the statute as i told this committee when i appeared before them in my confirmation process. and since that is occurred in 2016, $382 billion -- million, million dollars, not billion, has been contributed to the trust fund in 2016 and $455 million has been contributed in 2016 earnings because -- it's always a year behind. so we don't have any control at fhfa about what happens with the funds after they are -- go over there. they go part to hud and part to

treasury, so we don't have any control over the disposition that has been made of those funds, but we did have the authority to make the decision to fund -- to -- to reverse the decision that had been made not to fund the housing trust fund and we made it, and i think it hopefully is served the useful purpose. >> i want to thank you for making that decision. as you pointed out that was consistent with the statute. i appreciate your moving forward and i just want you to know that maryland is using its allocation of those funds effectively. so thank you. thank you, mr. chairman. >> thank you. senator warren? >> thank you, mr. chairman. good to see you again mr. watt. i'm glad this committee is tackling finance housing reform again. i'll push the same point i've pushed since 2013. we need to end the government conservativetorship and we need to do so in a way that protects

taxpayers established and explicit government guarantee and gives more affordable housing options. on that question of access, director watt, as you know the cfbps define certain loans as qualified mortgages or qm and offer lenders legal immunity for loans that meet the qm standards. but cfpb also grants status for any mortgage that's eligible for perfect which means that the underwriting criteria at fannie and freddie helped define the scope of the qm rule and accordingly have a huge impact on the kinds of families that can get access to mortgage credit. despite all this, fannie and freddie's underwriting algorithms and criteria are kept secret. so can you explain why it is

reasonable to keep this information hidden given its importance, both to the economy and to appropriate oversight of the mortgage market? >> i don't know that i can explain that to you, senator, but i can -- i can have our agency explain it to you as we understand it, but i'm not sure that i have focused on that as an issue. >> well, let me suggest it this way then. i think it is an issue and instead of explaining it to me, what i'd really like to do is get a commitment as soon as we can that we would make this information public. >> i wouldn't make that commitment without knowing why it's not public. >> i'm glad to pursue that. >> that would be part of what we would be handling. >> as long as these entities are in conservativetorship and as long as their standards are setting the boundaries of our consumer federal protection

issues, i think it's important that they be public. we can't exercise oversight without that. so let me ask another question. and that is about principal reduction. in the 2008 bank bailout, congress required fhfa to adopt a plan and i'm going to read here that seeks to maximize assistance for homeowners and minimize foreclosures and congress specifically requires fhfa to consider principal reduction to achieve those goals. that was in 2008. and for years, fhfa did nothing and people kept losing their homes. and when you were nominated to run the agency in 2013, you said you would tackle principal reduction. i asked you about it repeatedly but for two years after you were sworn in, you didn't move an inch on this. finally, in april of 2016, you announced a principal reduction program that's eight years and literally millions of

foreclosures later. even then, you used eligibility criteria that were so demanding that by your own calculations only 33,000 borrows in the entire nation would qualify for principal reduction. and worse, you didn't actually require services to reduce the loan principal for those 33,000 eligible borrows, you only required them to quote, solicit borrows eligible for principal modification no later than october 15th of 2016. all right. we're now nearly seven months past that october deadline. i've looked at fhfa's quarterly foreclosure reports. i can't find anything information about how this program is working. so i just want to know, how many of those 33,000 eligible borrows as of today have actually gotten a principal reduction? >> i can't give you the exact number but i can tell you it's a

small number, the 33,000 is a small number and i've tried to explain why that is so. >> i get that the 33,000 is a small number. what portion of the 33,000? can you give me a ballpark? >> i'll provide it to you. i just don't have it at my fingertips. >> do you have -- half? >> i don't think it's half. >> a quarter? >> i think our projections indicated that it would be more in the range of 15 to 20% would be -- who would likely be able to do this. >> so after congress mandated a plan -- >> you didn't mandate that. wait a minute. >> we did in 2008. it's written in the statute. it says. >> but there's also a statute that -- that a counter veiling in the statute that says we cannot do certain things that are not economically feasible. so the analysis i did -- >> i'm sorry. i'm sorry, director watt. >> to get to the 33,000, got to the people that we could do with

justice to both statutes. >> for years, for years, people lost their homes because fhfa would not enforce the part of the bill that says give some relief to homeowners and study after study showed that it was economically feasible to do that and instead millions of people lost their homes. >> senator, that's just not true, now. what we didn't do was principal reduction but there are millions and millions of people that we have provided relief for whose homes were in jeopardy. so to say that we haven't done anything in that space just because we did a modest principal reduction program is just not true. >> but you didn't do the principal reduction. >> we did not do the principal reduction and i have explained that to you muflt times in this committee. why. >> actually it's interesting. you did not start out explaining

it. you started out saying you would do it. i asked you in this hearing room over and over, i asked you originally at your confirmation hearing and at follow-up oversight and you did not say, we've already done something else. you said you would do principal reduction. >> i do not believe if you go back and look at the record either at my confirmation hearing or at any point in this hearing, in the hearing where we discussed this that i made that commitment to you. i said i would look at it. i would do it accordance with the statute and that's exactly what i have done. >> and now you're down to a few thousand people. after the crisis, the money just flew out the door for the banks. billions and billions of dollars as fast as people could sign the checks, but money for people, many of whom had been ripped off by those same banks, it was just one mention of delay and no and we have to balance this other

thing out, hand wringing about moral hazard excuses. >> i certainly hope you're not blaming me for that. >> you were in charge for at least -- >> i didn't create that situation. i tried to stop it when i was a member of the house by getting people to quick making loans to people who could not afford to repay them. i was the original author of the bill so i don't know -- i agree that all of those things have taken place, but to make it sound like, for some reason, i am responsible for that, i think is unfair and untrue and unjust. >> so let me -- >> and you will of the uns that i can think of. >> mr. watt, the people who preceded you certainly share the blame. they did nothing. but when you came in, you've been driving this bus since 2013 and on principal reduction by your own numbers at best a few thousand people have gotten help.

and i think that is shameful. >> we need to move on. i've let this go on a bit so the two of you could get it out, but it's -- it's out. now it's senator reed's turn. senator reed? >> thank you, mr. chairman. director, in your testimony you state and i quote, like any business enterprise needs some kind of buffer to shield against short-term operating losses. in fact, it is especially irresponsible for the enterprises not to have such a limited buffer because a loss of any quarter would result in a additional growth of taxpayer support and reduce the fixed dollar commitment that the treasury department has made to support the enterprise. by additional support of taxpayer support what i hear you say is you want to prevent taxpayer bailout, is that accurate? >> there's that risk that -- that it could -- additional draws could be misinterpreted by and we have to guard against

that risk, yes. >> in fact, what you want to do is have a buffer in your organization so that you can respond to a changing conditions we monitor closely changing conditions in the market. these are noncredit related factors that are driving losses sometime that have nothing to do with whether we're responsible or not. they're basically accounting the way you have to account for things and the timing of the accounting process. so it's really not even about losses. it's more about accounting things. now if tax reform were done, depending on thex tent of the

corporate tax deduction, there would be an immediate impact. that would be one of the factors we would be monitoring regularly to see what's happening in that space. but this is a risk that -- i don't want to make it sound like it's a likely thing to happen because i think that could be misinterpreted. but as conserve tor we don't have the luxury of assuming that risk. and you weren't here earlier when i used the example of when i got the notice that the airbag on my car needed to be replaced. and everybody was telling me that's not a problem. but i was the responsible party in my family and now i am the

responsible party. i am driving these cars. until congress changes the cars that i'm driving, i have to drive them and make them safe and guard against even the remote risk that we have. >> there was a discussion obviously of the principal deduction but there are a number of loans, i'm told 59,000 nonperforming loans which i'm told fanny and freddy have sold to that private sector and made subject to some type of remediation. could you tell us what you've done to improve the borrowing outcomes. >> so i wish senator warren was still here to hear this.

one of the reasons we did nonperforming loan sales was that the private sector who buys these loans has substantially more flexibility than fan a and freddy have to do principal reduction and it's part of the water fall in the nonperforming loan sales program. they're required to consider that as an option if it would improve the ability of borrowers to perform on their loans and get those loans reinstated at some reduced interest rate or longer term or reduced principal amount. all of those things in the nonperforming loan requirements that we have adopted. we couldn't do anymore than we did as fanny and freddy but we

could transfer the loans to the private sector and they have substantially more flexibility and that was one of the basis on which we did that. >> just a final point mr. director. we get all of us get feedback from borrowers that they haven't been helped. can you -- and i presume you have already some metrics about the different types of measures that have been taking and as you deskre described a lot of it is within the purview of the banks because they have more flexibility. but i think that would help in terms of a principal reduction. it could be -- the ultimate number is how many people are still in their homes and can stay in their homes even though

they've had difficulty. >> so we do keep metrics on all of those things because they're required to report to us on the outcomes because they are requirements that they assume when they purchase the loans and the only way we can monitor compliance is to know what the actual performance is and their results are substantially better than the results that we would have gotten had we maintained those nonperforming loans on the books of fanny and freddy. >> i think that could be helpful. you may not keep this metric. but if you have data that shos s what happens when they forclose because if there's an incentive to forclose because you can sell the exact same property --

>> i think we removed that incentive. but we can provide that. >> thank you, very much. >> thank you very much, senator reed. and director what? that's the end of the questions. you've been here essentially two hours and geven us your time and responded openly and honestly to these questions. >> before we wrap it up, let me just say to all senators we'll have seven days and as you know there will be additional questions in writing that i ask you to respond to promptly. one is that i've already asked. the legal justification that you can unilaterally issue dividends. i again want to thank you. we're obviously heavily interested in and engaged in this issue and we'll continue to work with you as we work to develop the best housing policy we can develop for this country.

thank you, director watt. this hearing is adjourned.

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in a world of ambiguity and temptation, you need a moral compass. you must develop principals you compromise for no one. not for a lubbed one, not for a job and not for a chance at fame or wealth. >> and whether the individual works in the legal, governmental or private realm, one dedicated person can meaningfully effect what some consider an uncaring world. >> starting at the bottom is not humiliation, it's humility. an honest assessment of where wrou are in the learning curve. so bull dog forward. >> so the goal, excellence. the agenda, plenty. peace. protection of the environment, pride in pluralism. >> just a few past commencement speeches from the c-span video library and watch commencement

speeches by politicians and white house officials on may 20th, 27th, memorial day on c-span. saudi arabia's ambassador to the u.s. and a former u.s. ambassador to saudi arabia discussed the kingdom's efforts to fight terrorism. the middle east policy counsel hosted this panel in washington d.c. it's just under two hours. >> good afternoon and thank you for joining us today for this important and i believe very timely event. my name is richard surer. i'm the chairman of the board of the middle east policy counsel. and it's my privilege to welcome you to this special program on examining